Internal controls

Question) In pursuit of ever greater profits to satisfy the shareholders, the supermarket chain Dutton had searched overseas for cheaper suppliers. Unfortunately, this strategy failed when the following headline appeared in the newspapers.

‘Dutton supermarket poisons customers’

Government inspections of farming facilities in the chosen countries were almost non-existent so Dutton had employed a local inspector to work closely with factory managers and to carry out food hygiene audits. When the news of the disaster were first reported to the board six months after problems begun, the inspector simply disappeared and still cannot be traced.

In their defence, the suppliers say they were forced to cut veterinary attention to their herds because of the low rate paid by Dutton for their meat. The result was that large amounts of infected foodstuffs were exported to the supermarket’s home country.

When interviewed as part of a review of the failure in control, Dutton store managers said that they had known for some time that there was something wrong with the meat. As part of their routine goods inward inspection, they examined the cellophane wrapped cuts and threw out any that seem discoloured. Most say they had not received any complaints from customers regarding ill effects following consumption of the product.

The CEO of Dutton, Jon Cooper, fears that the repercussions of this event will have a serious effect on this year’s profit. Some customers have defected to competitors whilst an environmental group is protesting at some larger stores. There are rumours of a government audit of the company’s supplier systems and they have, of course, needed to commence a search for a new and hopefully cheaper supplier in another country.

Examine failures in internal control At Dutton and recommend improvements.

I used the COSO framework for my answer. I’m not too sure about the component “Control environment”

The control environment at Dutton is weak. Jon Cooper(CEO) seems to give greater importance to profits rather than the quality of meat and public safety. If he, as the CEO himself, do not bother about internal controls , then its likely that the staffs and store managers will not take internal controls seriously as well. They will tend to have a mindset that its okay to not follow the controls because as employees, they will definitely follow the lead of their CEO, Jon. This could have contributed to the internal control failures.

Is my above answer for control environment correct sir?